The Reserve Bank in Pretoria. Picture: FINANCIAL MAIL
The Reserve Bank in Pretoria. Picture: FINANCIAL MAIL

Bankers have been meeting Treasury and Reserve Bank officials every day for the past couple of weeks to hammer out details of the new R200bn loan guarantee scheme the banks will launch for small and medium-sized business customers in coming weeks.

The scheme aims to ensure that companies shut down by the coronavirus crisis can stay alive long enough to eventually recover. It’s ultimately government aid, provided via the Bank — but it uses the infrastructure of SA’s banking industry as a conduit to get the money to firms, “to save jobs and support the economy”, as the Banking Association of SA (Basa) puts it.

The scheme, with initial funding of R100bn, will enable the banks to grant loans to eligible clients with turnovers of up to R300m that are financially distressed because of the lockdown.

The loans, at the prime lending rate, are to enable companies to pay salaries, rent and other operating costs for three months. They may have to put up surety but will only have to start paying interest and capital on the loans after six months, and will have up to five years to repay.

Graphic: RUBY-GAY MARTIN
Graphic: RUBY-GAY MARTIN

SA joins a list of 51 countries that have put similar guarantee schemes in place, according to Intellidex, and at about 4% of GDP the funding is more generous than in many other countries, some of which have had more success than others with their schemes.

But why does SA need such a scheme, given that the banks have already undertaken to assist distressed clients, with the Bank’s regulatory blessing? How will the scheme work and what will its impact be on small and medium-sized enterprises (SMEs), on the banking sector and, ultimately, on the national balance sheet?

The banks responded early in the lockdown by offering loan forbearance and payment holidays to financially distressed clients in good standing. They were assisted in this by the Bank, which reduced capital and liquidity requirements, releasing, in theory, up to R300bn of lending.

Jacques Celliers. Picture: SUPPLIED
Jacques Celliers. Picture: SUPPLIED

Five weeks into the lockdown, banks are already dealing with significant distress. Moody’s and Fitch downgraded the banking system this week, pointing to the sector’s worsening prospects and profitability.

Standard Bank, one of SA’s business lenders, reports for example that it has already granted instalment relief to 150,000 clients. It has welcomed the new scheme, as have the other banks, with FNB CEO Jacques Celliers describing it as “further evidence that partnerships can help South Africa respond decisively to the impact of the global pandemic”.

The problem for the banks is that it’s very hard to make new loans to customers, even those in good standing, that are shut down altogether and have no income — nor any certainty as to if and when they might reopen and start bringing in revenue again. The new scheme will give them the funds to pay staff and suppliers while they are not operating, in the hope this will tide them over and allow them to start up again once they are allowed to do so.

It has a more macro, systemic purpose as well, as Nedbank CEO Mike Brown notes. Says Brown, who is also president of Basa: “The scheme ensures the velocity of money in the system doesn’t grind down to zero — because if everybody stops paying everybody, the whole system will freeze.”

This is why such schemes have to be backed by a government guarantee — but equally, banks have to have “skin in the game”, as one official puts it, to ensure they don’t take advantage of the government.

Mike Brown. Picture: SUPPLIED
Mike Brown. Picture: SUPPLIED

The banks will take the second loss, on 6% of the value of the loan, as well as putting a further 2.5%, including a guarantee fee, into a fund that will take the first loss.

The rest of the loss — incurred due to companies defaulting on their loans, as many of them might — is borne by the government. The government will also pocket any profit —  the banks don’t stand to make money from these loans, which will be separate, ringfenced parts of their balance sheets, though their administrative costs and cost of capital will be covered.

The banks evaluate those who apply, using their own credit criteria and disburse the money — but it is the Bank that administers and oversees the whole scheme and puts up the funds, which it makes available to the banks through a special repo window.

The potential market is large, and economically crucial. A FinFund survey found SA’s informal-sector SMEs have between 2-million and 3-million full-time employees.

Because if everybody stops paying everybody, the whole system will freeze.
Mike Brown, Banking Association of SA president

The Treasury estimates there are as many as 700,000 firms, including quite large ones, with turnovers below R300m, though clearly only somsome them need or would qualify for the loans.

The loans are no “silver bullet” for recipients — interest will be capitalised into the loan and companies that survive will be repaying for years to come. The three-month term and the five-year repayment period may not be enough, and nor is there provision for larger companies that are at risk.

But the initial R100bn can ultimately be scaled up to R200bn depending on demand, so the scheme could enable larger, longer loans, or more of them.

The scheme will expand the Bank’s balance sheet and the guarantee will add as much as R200bn to the contingent liabilities on the government’s own balance sheet. The coming years will see how much of that guarantee is eventually called on if companies default.

If it works, however, the scheme could go some way to mitigating job losses and the erosion of SA’s economic capacity, and give the economy at least some basis to stage a recovery as the crisis winds down.

How quickly and easily the loan scheme will work will soon become apparent, but banks expect a flood of applications. Brown cautions that there will inevitably be backlogs, as in other countries, but Basa promises that its members will work through these as quickly as possible and asks clients to be understanding.

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